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2011-09-14 16:09:33

The Part Time Real Estate Investor- Doing the numbers

In this article, I’m going to focus on how to acquire a single family home (SFR) as a long term rental investment.  So let’s begin.

SFRs make great investments for long term rentals.  Many families use SFRs to live in before they purchase their own home.  SFR renters are typically families that need some stability in their living situation (unlike apartment dwellers who are typically younger, unmarried and very mobile).  I invest in both SFRs and apartments but I’ll focus on SFRs for now.

How to evaluate the purchase of a SFR:

1)       Know the neighborhood.  Are the homes here in a decent area?  Has the neighborhood declined in the most recent years?  What kinds of homes are here?  What are the average rents in the area?  Are they block homes or are they wood framed?  How many bedrooms do these homes typically have?  Do the residents here take care of their homes?  What kinds of cars do they drive?  Are these homes between 40-80K, 81K-125K,126K-160K and so on?  Is the neighborhood close to major businesses, the highway, public transportation, shopping, entertainment?  There are literally dozens of questions you should ask yourself about these neighborhoods.  The point is to find a few neighborhoods you like and stick to investing in the areas you know like the back of your hand. 

2)      You don’t need a fancy home to rent.  Most SFR rentals are sturdy, not very fancy, low maintenance homes in middle class, blue collar and white collar neighborhoods.  These are my favorites.  There is an endless supply of target homes here that are usually priced right where I like them.

3)      Work with your real estate agents to bring you homes that fit your criteria.  I personally like to purchase rent ready homes so I don’t have to become a project manager (remember, we work full time).  My agents know not to send me anything that needs significant repairs.  The less, the better.  I let them do most of searching so when they do send me something, I know it’s probably a good target for acquisition. 

4)      3bd/2bth homes are the best.  Three bedroom/ 2 bath homes are ideal for SFR investments but I occasionally make exceptions.  I own plenty of 3/1s too but it’s primarily due to the fact that the neighborhood more commonly has 3/1s than 3/2s.  I would urge you not to invest in 1 or 2 bedroom homes.  They are difficult to rent and very tough to sell later on.

5)      OK, so you found your first target.  You have it under contract and now have it inspected.  Look over that inspection carefully!  Is the roof going to last for another 15 years, 10 years, or 1 year?  Is the A/C old or is it going to hopefully last another 5-10 years.  Why is this important?  Because you don’t want to buy a SFR that is going to have thousands of dollars in repairs to be made quickly after you purchase it.  If the inspection report comes back with significant issues, you can renegotiate a “maintenance rebate or maintenance escrow” from the seller.  This is money held in escrow for you to spend on repairs after you take possession of the property.  DO NOT ask for a lower purchase price.  This won’t help you pay for the repairs when they occur!

6)      Calculating a good deal.  What kind of return are you expecting after all the bills are paid?  You’re largest bill will likely be the mortgage right?  Have you calculated what the mortgage payment, insurance and taxes will be?  I always have the mortgage broker combine the payment so I never underestimate my biggest expense. If I can’t make a net profit within $100 of my mortgage, tax and insurance payment, I either negotiate a better deal or I walk away to find a better deal.  Let me explain, ie:

Home price is $72,000

Downpayment fo 20%

Estimated payment including mortgage, taxes and insurance is $459

SFR rents for $950

Payment to my property management company is 10% of payment or $95 per month (which I will explain the importance of later)

Equals a net profit of $396 per month ( which is within $100 of my total mortgage payment of $459)

 

I never want to have one month of vacancy take over two months to pay me back for the mortgage payment.  Do you see how I did that?

 

There are more articles to come so stay tuned.

 

Best regards,

 

Ryan Hamaker

 

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